The Role of Health in Retirement

This paper constructs and estimates a dynamic model of the evolution of health for those over the age of 50 and then embeds that model of health dynamics in a structural, econometric model of retirement and saving.

The health model traces the effects of smoking, obesity, alcohol consumption, depression and other proclivities on medical conditions, including hypertension, diabetes, cancer, lung disease, heart problems, stroke, psychiatric problems and arthritis. These in turn influence an overall index of health status based on self-reported health, work limitations and ADLs, which is used to classify the population into good, fair, poor or terrible health.

Compared to a situation where the entire population is in good health, the current health status of the population reduces the retirement age of the entire population by an average of about one year. While poor health or terrible health have a great impact on the disutility of work and thus on retirement, fair health as opposed to good health has a relatively minor effect. Smoking depresses full-time work effort by up to 3.5 percentage points by those in the early sixties, reducing the average retirement age by four to five months. Effects of trends in health care and health policies on retirement are also analyzed.

Including detailed measurement of health dynamics in a retirement model improves understanding of the effects of health on retirement. It does not, however, influence estimates of the marginal effects of economic incentives on retirement.